Australian business still wants workers

Matthew Peter, Chief Economist

Australian market sentiment has taken a battering recently as our major trading partner China looks like succumbing to US tariffs, our currency remains under pressure and as indicators of business and consumer confidence continue to ebb. Above these concerns, hangs the Damoclean Sword of the Australian housing market. But these risks, which have been fermenting for six months or more, are yet to dim two shining lights of the Australian economy: employment growth and the strength in our terms of trade. This week, we received the latest update on the labour market from the Australian Bureau of Statistics (ABS).

Over the month of December, the Australian labour market added 21.6k workers, slightly more than our (+20k) and the markets (+18k) expectations. The December outturn consolidates strong performances in October and November, resulting in a solid monthly average of 29.1k workers finding jobs over the last quarter of 2018. The yearly growth rate in employment remains elevated at 2.2%. While employment growth has moderated from the 3.6% break neck pace at the start of 2018, it continues to outpace population growth by over ½ percentage point. The strong jobs performance in December combined with a very slight moderation in the historically elevated labour force participation to drive the unemployment rate down to 5%; a level considered by the Reserve Bank of Australia (RBA) to be consistent with full employment. The ongoing strength in employment growth has seen the unemployment rate drift lower from 5.5% a year ago. Despite strong labour market performance since its nadir during the collapse in the mining boom, the stylised fact is that higher rates of employment growth and lower rates of unemployment have failed to deliver wage growth. However, wage growth found its trough around two years ago and since yearly wage growth has climbed from its low point of 1.9% to 2.3% currently.

Some commentators point out that after accounting for inflation, the real wage (i.e., the spending power of wages) has not risen for an extended time. This is not accurate. Over the last two years, wages have increased by 4.3% (as measured by the Wage Price Index), while consumer prices have increased by just 2.9% (as measured by the national accounts Personal Consumption Expenditures (PCE) deflator). If measured by the CPI (the more commonly reported measure of consumer prices, but a less broad measure than the PCE deflator), wages are still ahead of inflation, but by the lesser amount of ½ percentage point. Over a longer period since 2010 (i.e., post the GFC), yearly wage growth has averaged 2.8% and yearly inflation (as measured by the PCE deflator) has averaged 1.8%. Hence, real wage growth has averaged 1.0%. A 1% annual growth rate in the spending power of wages might seem low to many people. How should we be thinking about the appropriate rate of growth in the real wage? Economists typically think of a sustainable rate of growth in the real wage to be around the growth rate in labour productivity. There are a number of reasons why economists think this, but a straight forward explanation centres around the relationship between real wage growth, company profits and employment growth.

With real wage growth matching productivity, profit margins remain stable allowing businesses to meet their production targets while also delivering a rate of return on capital and debt required by shareholders and creditors. Stability in profit margins enables firms to plan for steady growth in production, investment and employment. If wage growth exceeds productivity, profit margins are squeezed forcing firms to cut production, investment and employment, while if productivity exceeds wage growth, profit margins will widen and leading businesses to ramp up production, investment and employment. If firms cut production and employment, the unemployment rate rises and wage growth slows until profit margins are stabilised. If firms ramp up production, eventually the employment growth rises, the unemployment rate falls and wage growth goes up.

So, what has been our productivity performance post the GFC? Based on national accounts data, Australia’s average yearly growth in labour productivity is 1%. Hence, wage growth has kept pace with both inflation and productivity over the last eight years since the end of the GFC. More recently, our labour productivity performance has slumped. Based on the national accounts, the Australian economy has managed to eke out just 0.3% yearly growth in productivity over the last two years, so it is not surprising that the recovery in wage growth has been underwhelming over that period. For an economy where much of its wealth is generated in highly competitive international markets, the requirement that strong wage and profit growth should rewards from strong productivity rather than from entitlement should be clear. While strong employment growth and a falling rate of unemployment will assist in driving higher wage growth, higher wage growth in the Australian economy can only be sustained if growth in productivity also lifts.

Table 1: Financial market movements, 17 – 24 January 2019

Equity index



10-yr government bond



Foreign exchange



S&P 500





-3.5 bps

US Dollar Index (DXY)



Nikkei 225





0.5 bps




FTSE 100





-7.2 bps









-6.3 bps




S&P/ASX 200





-0.9 bps




Source: Bloomberg

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